Profitable Growth by Acquisition 581synergy, or potential for value creation. For the deal to benefit the acquirer ’s
shareholders, management must do two things. The first is to pay a premium
that is less than the potential synergy. Many acquisitions that make strategic
sense and generate positive synergies fail financially simply because the bid-
der overpays for the target. The second task for the acquirer ’s management is
to implement the steps needed after the transaction is completed to realize
the deal’s potential for value creation. This is a major challenge and is
discussed further in section VII. In the next section we brief ly present some
of the key issues managers should consider when initiating and structuring
acquisitions.
SOME PRACTICAL CONSIDERATIONS
In this section, we brief ly discuss the following issues you may encounter in de-
veloping and executing a successful M&A strategy:
- Identifying candidates.
- Cash versus stock deals.
- Pooling versus purchase accounting.
- Tax considerations.
- Antitrust concerns.
- Cross-border deals.
This is not meant to be a comprehensive presentation of these topics. Rather,
the important aspects of each are described with the focus on how they can in-
f luence cash f lows and synergy. The goal is to make sure that you are at least
aware of how each item might affect your strategy and the potential for value
creation.
Identif ying and Screening Candidates
Bidders must first identify an industry or market segment they will target. This
process should be part of a larger strategic plan for the company. The next step
is to develop a screening process to rank the potential acquisitions in the indus-
try and to eliminate those that do not meet the requirements. This first screen
is typically done based on size, geographic area, and product mix. Each of the
target’s product lines should be assessed to see how they relate to (a) the bid-
der ’s existing target market, (b) markets that might be of interest to the bid-
der, and (c) markets that are of no interest to the bidder. Keep in mind that
undesirable product lines may be sold.
It is also important to evaluate the current ownership and corporate gov-
ernance structure of the target. If public, how dispersed is share ownership
and who are the majority stockholders? What types of takeover defenses are in